Hypothesis testing

Before hypothesis testing some of the subcomponents of the indexes were deleted, however, there are still may be high correlation between the remaining variables, which may weaken the model. To avoid this problem, correlation analysis should be performed (see Appendix 9:

Correlation table). Some of the variables highly correlate with each other, so we can not include them into one model simultaneously. In order to check the effect of each variable, the analysis should be conducted several times. There are also some missing values in data set, which are connected with the fact that World Bank, Heritage Foundation, Transparency International, Property Rights Alliance and Freedom House do not provide indexes for all countries and for all years. By eliminating observations with missing values we arrive to the data set with 96 observations, which is still enough to conduct panel regression, because as we can see from the tables below, all the models have explanatory power.

Fixed-effect (within) regression

Number of observations: 96 Number of groups: 10 Prob > F: 0.0284

FDI Coefficients St. Error T p > |t| 95 % Confidence interval

Starting Business Distance -.6952542 .553782 -1.26 0.213 -1.797975 -.4074666 Dealing with Construction

Permits Distance

.0157572 .2363744 0.07 0.947 -.4549243 .4864387

Enforcing Contracts Distance -.2281994 .8321604 -0.27 0.785 -1.885242 1.428844 Corruption Perception

Distance

-1.175416 1.166721 -1.01 0.317 -3.498655 1.147824

Tax Burden Distance -1.221476 .9875833 -1.24 0.220 -3.188006 .7450536 Labor Freedom Distance 1.269068 .7194756 1.76 0.082 -.1635907 2.701727 Monetary Freedom Distance -.8617474 .6259297 -1.38 0.173 -2.108133 .3846378 Trade Freedom Distance 1.324822 .4005963 3.31 0.001 .5271324 2.122511 Investment Freedom

Distance

.849712 .4708662 1.80 0.075 -.0879023 1.787326

Const 1.331126 39.67928 0.03 0.973 -77.68042 80.34267 Table 4: Model 1

44 The analysis starts from checking overall model fit. From the Table 4 we can see, that p- value less than 0,05 (Prob>F=0.0284<0,05). That means that the model has explanatory power.

From the p-values of independent variables we can distinguish three significant predictors of FDI:

Trade Freedom distance (95% level of confidence), Investment Freedom distance (90% level of confidence) and Labor Freedom distance (90% level of confidence). It means that these three distances positively impact FDI from Russia to Latin America.

This model does not include Financial Freedom distance, Political Freedom distance and International Property Rights Index distance, because of correlation problem. In order to check whether they influence FDI or not, we should conduct the analysis several times more including each of these variables into the model one by one. The results are presented in the tables below.

Fixed-effect (within) regression

Number of observations: 96 Number of groups: 10 Prob > F: 0.0264

FDI Coefficients St. Error t p > |t| 95 % Confidence interval

Starting Business Distance -.763442 .5726096 -1.33 0.186 -1.903653 .3767694 Enforcing Contracts Distance -.1958631 .8339348 -0.23 0.815 -1.856439 1.464713 Corruption Perception

Distance

-1.211213 1.167443 -1.04 0.303 -3.535889 1.113464

Tax Burden Distance -1.366281 .9711023 -1.41 0.163 -3.299993 .5674306 Labor Freedom Distance 1.241677 .7095441 1.75 0.084 -.1712054 2.65456 Monetary Freedom Distance -.8020255 .636807 -1.26 0.212 -2.07007 .4660192 Trade Freedom Distance 1.376695 .4109243 3.35 0.001 .5584398 2.194949 Investment Freedom

Distance

.7847085 .3944915 1.99 0.050 -.0008246 1.570241

Financial Freedom Distance .19761 .430789 0.46 0.648 -.6602004 1.05542 Const 2.075384 34.44786 0.06 0.952 -66.51907 70.66984 Table 5: Model 2

From the Table 5 we can observe the same results for Investment, Labor and Trade Freedom distances. As to Financial Freedom distance, which was included this time in the model, no relationship was identified between FDI and Financial Freedom distance.

45 Fixed-effect (within)

regression

Number of observations: 96 Number of groups: 10 Prob > F: 0.0155

FDI Coefficients St. Error t p > |t| 95 % Confidence interval

Starting Business Distance -.6627674 .5519238 -1.20 0.233 -1.761563 .4360284 Corruption Perception

Distance

-1.185384 1.125459 -1.05 0.295 -3.426001 1.055233

Tax Burden Distance -1.36509 .918415 -1.49 0.141 -3.193514 .4633338 Labor Freedom Distance 1.262582 .7036902 1.79 0.077 -.1383575 2.663522 Monetary Freedom Distance -.9874896 .6602307 -1.50 0.139 -2.301908 .3269287 Trade Freedom Distance 1.314548 .3956956 3.32 0.001 .5267786 2.102317 Investment Freedom

Distance

.8278401 .3783668 2.19 0.032 .0745698 1.58111

Political Freedom Distance .36768 .8268849 0.44 0.658 -1.278521 2.013881 Const -19.62095 56.64694 -0.35 0.730 -132.3963 93.15445 Table 6: Model 3

By including Political Freedom distance into the model, we did not manage to find any positive or negative impact of Political Freedom distance on bilateral FDI.

Fixed-effect (within) regression

Number of observations: 96 Number of groups: 10 Prob > F: 0.0219

FDI Coefficients St. Error T p > |t| 95 % Confidence interval

Dealing with Construction Permits Distance

-.5246302 .3640058 -1.44 0.154 -1.251189 .2019285

Tax Burden Distance -1.825404 1.324236 -1.38 0.173 -4.468591 .8177823 Labor Freedom Distance 1.484071 .8998072 1.65 0.084 -.3119516 3.280094 Monetary Freedom Distance -1.087863 .9131856 -1.19 0.238 -2.91059 .7348627 Trade Freedom Distance 1.638939 .5454912 3.00 0.004 .5501344 2.727744 Investment Freedom

Distance

1.005684 .7003973 1.44 0.056 -.3923146 2.403683

International Property Rights Index Distance

.6107844 1.671827 0.37 0.716 -2.726197 3.947766

Const -30.81645 44.30329 -0.70 0.489 -119.2462 57.61329 Table 7: Model 4

46 Including International Property Rights (IPRI) distance did not help to identify any relationship between IPRI Distance and FDI inflows to Latin America.

Summarizing results

From the results of panel regression, we can conclude that only Economic Freedom distance, namely Labor Freedom, Trade Freedom and Investment Freedom distances, has significant positive effect on FDI, meaning that the Hypothesis 1 is partly proved, three dimensions of Economic Freedom distance impact positively the amount of bilateral FDI. Taking into consideration the fact, that all these three distances are in majority of cases positive (except shift during last years in Trade and Labor Freedom (see Figures 6,7,8)) and none of them negatively impacts FDI, we can state that Hypothesis 3 is proved as well, positive institutional distance does not negatively affect Russian FDI in Latin America. The same thing we can state for other positive institutional distances: general Economic Freedom distance, Political Freedom distance and Corruption Perception distance.

Figure 6: LF distance (calculated by author) Figure 7: TF distance (calculated by author)

Figure 8: IF distance (calculated by author)

The positive impact of these distances shows recent shift of Russian companies from resource and market seeking to efficiency and strategic assets seeking motivation to invest abroad.

As it was discussed in the first chapter, resource seeking companies are tend to choose host

47 countries in favor of those which have approximately similar institutional development; efficiency, market and strategic assets seeking companies, vice versa, locate FDI in more favorable institutional environment. The absence of any negative effect of institutional distances tells us about the change of general strategy of Russian investors - from resource and market seeking to market and efficiency or strategic assets seeking strategy.

The most significant predictor of FDI here is Trade Freedom distance, which was positive until 2013, meaning that Latin American countries are capable to provide more favorable trade conditions. The fact, that this is one of the main factors, which stimulates Russian FDI in Latin America, indicates the growing share of Russian secondary or tertiary FDI (instead of primary) in Latin America. Last decade Russian MNEs have been involved in several huge investment projects in production industries and services, for example Sodruzhestvo Ltd (fertiliser production and wholesaler), Tyazmash OJSC (construction and electricity services) and Power Machines OJSC (construction machinery), Utair OJSC (transport services) and many others. The positive impact of Labor Freedom distance also proves the shift to efficiency seeking strategy of Russian companies in Latin America. The fact that increasing labor rights in the host region attracts Russian FDI indicates willingness of Russian investors to operate in the countries, where educated and skillful workforce is available. This relationship also indicates growing capabilities of Russian companies to provide more competitive and safe labor conditions. Positive Investment Freedom distance also has positive impact on Russian FDI in Latin America, meaning that one of the main decision-making factors for Russian investors is investment protection regulations. To sum up, positive effect of positive economic freedom distance on Russian FDI in Latin America indicates the intention of Russian companies to operate in more developed institutional environment, which results in rising effectiveness and competitiveness in international arena.

This analysis did not identify any significant influence of Corruption Perception distance and Political Freedom distance on FDI. It may be connected to improvement of institutional environment in Russia for the last 16 years and decreasing the motivation of Russian companies to transfer capitals in order to avoid political risks in Russia.

The Ease of Doing Business distance does not seem to have any significant effect according to this analysis. It is quite explicable, because Ease of Doing Business distance varies across countries from large positive to large negative (See Appendix 7: Indexes and FDI flows), and the relationship between this distance and bilateral FDI is hard to identify. However, from Ease of

48 Doing Business Index in this analysis were used only 3 components: Starting Business, Dealing with construction permits and Enforcing contracts. Enforcing Contracts distance highly correlates with Corruption Perception Distance (see Appendix 9: Correlation table), which is obvious, because corruption is informal institution, which influences the effectiveness of judicial system. Thus, the absence of proven relationship between FDI and Enforcing Contracts distance may be partly explained by the absence of significant effect of Corruption Perception distance and Political Freedom distance. As to Starting Business and Dealing with Construction Permits, these two indicators are more important for companies, which are involved in large construction projects in Latin America. It is hard to predict the share of such kind of projects in total FDI flows from Russia to Latin America, but, most probably, this share is not big enough; that is the possible explanation of why the analysis failed to identify any relationship between FDI and Starting Business and Dealing with Construction Permits. Another explanation may be connected to the influence, which corruption has on these two indicators. Starting Business and Dealing with Construction Permits evaluate money and time costs of different procedures related to obtaining permits, licenses and other documents. Obviously, the quality of these regulations depends on corruption level. Hence, if corruption distance does not have significant impact on FDI, these two distances most probably will not impact FDI significantly as well.

For property right regulations distance this analysis also did not identify any influence on FDI. As it was covered in Chapter 2, IPRI contains corruption control and judicial independence components, which possibly reduced the significance of this factor for FDI inflows. Possible reasons of why these components do not influence FDI in this analysis were discussed above.

Following the similar logic, we can explain the absence of relationship between property rights distance and FDI. Most probably, Russian companies gained good adaptation skills and are capable to operate easily in institutional environment, which differs from home country. Another possible reason may be connected with the fact, that a property rights distance is not very significant (see Figure 9), thus does not influence FDI.

Figure 9: IPRI Distance (compiled by the author)

49